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Proposed improvements to the New Zealand Emissions Trading Scheme

Information on tranche one NZ ETS changes

The Government has made decisions to improve the NZ ETS

This is the first tranche of decisions on improvements to the NZ ETS. A second tranche of decisions is expected in 2019. These decisions will result in a single bill amending the Climate Change Response Act 2002 (CCRA), expected to be introduced to Parliament in the second half of 2019.

The decisions are to:

align the CCRA with the Paris Agreement and any new emissions reductions targets, by:

refining the purpose of the CCRA to ensure it assists with delivery of any new targets

supporting implementation of the Paris Agreement

enable a cap to be placed on emissions covered by the NZ ETS through:

introducing the auctioning of New Zealand Units (NZUs) in a way that aligns the supply of NZUs in the NZ ETS to our emission reduction targets

retaining the ability to limit international units if a decision is made to introduce the use of international units

replacing the current price ceiling (the $25 fixed price option) with a cost containment reserve through auctioning, and investigating a price floor

providing the framework for making unit supply settings in the NZ ETS over a five-year rolling period

Specific non-forestry decisions

Aligning with emissions reduction targets

The CCRA amendments will support implementation of New Zealand’s reporting and emissions reduction targets under the Paris Agreement. This includes our target under the Paris Agreement of reducing greenhouse gas emissions by 30 per cent from 2005 levels by 2030, as well as any new targets introduced through domestic legislation.

Introducing auctioning

Auctioning of NZUs will be introduced into the NZ ETS in a way that aligns the supply of units with New Zealand’s emission reduction targets. Auctioning is expected to begin in 2020.

Auctions will be a sealed-bid, single-round and uniformly priced format; a format used in all overseas emissions trading schemes that include auctioning. Auctions will initially be held either monthly or quarterly, and all New Zealand Emissions Trading Register account holders will be able to participate.

Limiting international units

The Government wishes to retain the flexibility to potentially reopen the NZ ETS to high-quality, reputable international units in the future.

International carbon units may be used after 2020 where:

the units are genuine and have environmental integrity

progress towards a net zero target is maintained

it makes economic sense to do so

it can be done in a way that maintains incentives for domestic abatement.

If the NZ ETS does reopen to international units, a volume limit would be placed on their use.

Retaining a price ceiling

The current price ceiling, the fixed price option, will be replaced with a cost containment reserve. This proposal was supported by most submitters in the recent public consultation. A price ceiling reduces the risk of unacceptably high prices negatively impacting investors and consumers.

The cost containment reserve will be incorporated into NZ ETS auctions. Units provided through the reserve will be backed by an equivalent tonne of removals. Regulations will set out the volume of units available and the trigger price at which these units will be released.

The Government has also decided that the fixed price option will retain its current level ($25) for surrenders due in 2019 in order to support ongoing regulatory predictability.

Currently, market participants can choose to pay $25 for every tonne of emissions they emit instead of buying units from emissions unit holders.

The Government has agreed that several considerations must be taken into account when setting the future price ceiling level, including international emissions prices and impacts on households.

Investigating a price floor

A number of submitters indicated that there may be value in introducing a price floor into the NZ ETS. The Government is investigating the potential introduction of a price floor, including an option of setting a reserve price in auctions.

Managing unit supply

A coordinated decision-making process will be established to manage unit supply in the NZ ETS. This process will, in future, set an overall cap on units supplied into the NZ ETS. Note: this will not put a limit on NZUs provided for removals including from forestry.

The cap will:

set limits on the number of units being auctioned

set limits on units available via the cost containment reserve

set limits on the use of any future international units

set trigger price values for the ceiling and any floor

announce how many units are expected to be freely allocated.

Unit supply announcements will be made annually looking forward five years.

Establishing an infringement offence regime

Infringement offences will be introduced to deter low-level non-compliance with the rules of the NZ ETS and the Synthetic Greenhouse Gas levy. These strict liability offences will result in financial sanctions for offenders but not convictions. Prosecutions will still be available for the most serious cases of offending. This will improve compliance outcomes while minimising administrative costs.

Prohibiting market manipulation and insider trading

We are introducing clear rules to govern the NZ ETS market. In this tranche of NZ ETS improvements, market manipulation and insider trading will become prohibited behaviours with associated penalties.

This will ensure that all participants are treated fairly and that smaller participants are protected from misconduct. The Government has decided not to make NZUs a financial product. Treating units as financial products risks imposing significant compliance costs on NZ ETS participants.

Decisions expected to be made in 2019

The Government is considering a number of further improvements to the NZ ETS.

Further decisions are expected in 2019 on:

the use of proceeds from auctions

a potential price floor

how decisions to phase down industrial allocation should be made

further improvements to the compliance and penalties regime

the broader market governance framework.

Consultation on unit supply settings and trigger price levels will happen during 2019.

More information will be available on the Ministry for the Environment website at this time.